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Remarks of Antony M. Merck before the Journal of Commerce OTI Summit, New Orleans - February 7, 2000

February 7, 2000

REMARKS OF

ANTONY M. MERCK
COMMISSIONER
FEDERAL MARITIME COMMISSION

JOURNAL OF COMMERCE OTI SUMMIT

FEBRUARY 7, 2000
NEW ORLEANS, LOUISIANA

Reaching the year 2000 has prompted numerous articles which review the last century, assess the present and make predictions about the future. Gregory Storey, writing in the Millennium Edition of the Journal of Commerce's Review and Outlook describes the present state of the transportation industry as on the crest of a wave with recent advances in technology and productivity. He also looks back 100 years and notes that transportation people felt the same way then. At that time ships had shifted from sail to coal, they were ten times bigger than at the start of the century before, scheduled service had been introduced, and wireless communication had originated.

In 1899 New York was the country's biggest port with two thirds of all imports and had begun a project to increase channel depth to 40'. San Francisco was the biggest port on the West Coast and the development of a deep water harbor in Los Angles had just begun. Interestingly, at that time the American merchant marine carried only 9% of the nation's trade but for the transportation industry and international trade overall it was a boom time a hundred years ago.

In his article Mr. Storey goes on to describe the picture today. The freighter of 4000 tons in 1900 is now an 80,000 ton containership. The "wireless" has developed into satellite navigation and internet communication. Los Angeles and Long Beach have surpassed New York and the largest ports are in Asia. The world is opening up, is more inter-connected and trade is expected to increase.

A recent book, Globalization and History: Evolution of a Nineteenth Century Atlantic Economy by Kevin O'Rourke and Jeffrey Williamson puts that boom time of 100 years ago in a larger context. The globalization which occurred then was more dramatic than what is occurring today. Transportation cost and trade barriers fell faster; capital flow as a percentage of national output was larger; and cross border migration was greater. Transportation technology (steamships, canals and railways) reduced costs and combined with government policy to boost trade. Cheaper transport and lower tariffs caused prices to converge. In 1870, for example, wheat cost 58% more in Liverpool than Chicago, but by 1895, it cost only 18% more.

Today as in the late Nineteenth Century almost everyone predicts that continued globalizations was inevitable. But O'Rourke and Williamson in their book describe how the losers in globalization provoked a backlash against it even before World War I sealed its fate. Cheap American and Ukrainian grain threatened jobs and Continental Europe closed its agricultural markets with high import tariffs. The U.S. raised tariffs to protect its infant manufacturing industry and restrictions on immigration occurred. In its review of the book The Economist magazine distills the message: "globalization can sow the seeds of its own destruction."

Last week newspapers reported on the World Economic Forum in Davos, Switzerland and used the word, "Globaphobia". Are labor standards and environmental standards code words for rich country protectionism or will labor standards coverage with trade induced development and increased wealth lead to better environmental conditions? The ocean shipping industry will be watching as this international debate unfolds. It will not be unaffected.

The FMC will be watching too because one of its most important functions is in international affairs. The Commission administers Section 19 of the Merchant Maritime Act of 1920, The Foreign Shipping Practices Act of 1988, and Section 13(b) (6) of the Shipping Act of 1984 (as amended by the Ocean Shipping Reform Act of 1998 "OSRA"). Its efforts are directed in three areas: combating restrictive foreign laws and practices which disadvantage U.S. interests; policing the pricing of foreign government controlled carriers; and reducing conflicts with trading partners over shipping regulation.

The latter role is carried out by the FMC acting as a technical advisor to executive agencies, by exchanging information, and making direct comments to foreign governments and organizations.

The Controlled Carrier Act provides generally that no government owned or controlled carrier may maintain rates below a level that is just and reasonable. The rationale is that a controlled carrier may operate without a commercial motive and, therefore, acutely distort the market. OSRA recently amended the Act to provide that a controlled carrier cannot reduce rates except on 30 days notice.

Combating restrictive foreign shipping practices is the most significant role of the FMC in foreign affairs. The Commission can impose fees or restrictions on operations of the maritime companies of the offending nation. The Foreign Shipping Practices Act protects U.S. carriers from adverse conditions abroad that do not exist in the U.S. for foreign carriers.

Section 19 of the Merchant Marine Act of 1920 is more expansive and authorizes and directs the Commission to "make rules affecting shipping in the foreign trade ... in order to ... meet special conditions unfavorable to shipping in the foreign trade ... which arise out of or result from foreign laws ..." A broad range of U.S. interests are protected: all carriers serving our trades and also shippers who have an interest in competitive service and choices in the market place; and other U.S. maritime companies including intermediaries and terminal operators. The "conditions unfavorable to shipping" include carriers' ability to service a trade and activities integral to transportation systems such as inter-modal services, agency services, and cargo solicitation.

The restrictive practices which Section 19 protects against have been broadly defined and the Commission is empowered as an independent agency to act unilaterally to impose sanctions. The FMC cannot negotiate or make an agreement with a foreign country but it can using the rule making process of Section 19 and receive comments from all affected parties and engage in consultations with executive agencies. This approach can be more effective than prosecutorial enforcement proceedings.

There are fewer U.S. owned carriers and there is increased attention to multilateral solutions. But with expanding trade there is an increasing number of U.S. shipping interests (importers, exporters, intermediaries, agencies, terminal operators). The FMC is charged with protecting these interests from foreign restrictive practices. The legislation requires it, the shipping public expects it, and it continues to be one of our most important functions.

The international affairs program is currently coordinated by a task force within the Commission made up of representatives from the various bureaus. The Commission is in the process of reorganizing its structure and programs, including the international affairs program, to facilitate our implementation of the amendments made to the Shipping Act by the Ocean Shipping Reform Act of 1998. It is a bit premature to make a detailed announcement at this time. I anticipate that in the coming weeks, the Commission will be issuing a formal statement with regard to our revised organization.

I would like to say however, that I think the reorganization will better match the structure and terminology of the laws we administer. It will also enhance our ability to conduct an ongoing two year agency wide study to determine whether OSRA is having the intended effect. We will look at the industry trends, mergers, carrier alliances, discussion agreements, rates and services.

When OSRA took effect on May 1, 1999 shippers and carriers were allowed to enter into confidential service contracts. Prior to that time the essential terms of service contracts were filed publicly and similarly situated shippers could demand identical terms: the "me too" provisions of the law. Under OSRA the essential terms of a service contract still are public but not the "rate". That may be kept confidential by the parties and thus foster greater competition and efficiency .

Service contracts are filed with the FMC through an internet based electronic mail system that is intended to be user friendly and reduce regulatory burden and expense. We have been flooded with contracts. Through January 31, 2000 95,357 contracts and amendments were filed which is 133% more than the same period a year ago.

I have heard it estimated that 85% of liner cargo is carried pursuant to a service contract rather than a tariff. Only the FMC has the service contracts and we intend to examine developments in service contracting; trends in rates and services; whether there are innovative and creative approaches; and confidentiality. Some have predicted "clever contracts" with service performance clauses, rewards and penalties based on performance, equipment availability or document completion. Evidence of "customized" not "standardized" service contracts will indicate OSRA is succeeding in doing as intended: placing greater reliance on the market and one on one negotiations.

Are there any early signs? The commentators have been saying that ports have been unaffected. There is little commentary regarding carriers but their actions speak loudly. The merger of Maersk and Sea-Land continues the consolidation trend.

Shippers as a group are described as generally satisfied with the current situation although they advocate free market principles to set rates for ocean transport by individual contracts and decry anti-competitive, price fixing cartel practices. A recent survey was more succinct: price and on time performance are the highest concerns of most shippers.

What about the OTIs, freight forwarders and NVOCCs lumped together by OSRA as Ocean Transportation Intermediaries?

I have read that freight forwarders who are compensated by commissions face a problem when carriers won't reveal the rate in confidential contracts. Some have changed to flat rate.

The most vocal group are the NVOs. They cannot sign confidential contracts with shippers under OSRA and numerous articles point out their dissatisfaction as a result. Vessel operators sell space and NVOs, in the vernacular, buy space at wholesale and re-sell it retail to forwarders and shippers. Shippers want worry free transport at the lowest rate; carriers don't want to only sell a commodity. They also want to sell the service that makes life worry free for the shipper and be paid a compensatory rate. In between are the OTIs some of whom, I understand, intend to air their grievances at upcoming hearings on legislation to abolish antitrust immunity for vessel operators.

I've not been in Washington before so I express no opinion on the prospects of that legislation.

But there are two recent items that may affirm the wisdom of OSRA and its premise of increased reliance on market forces. Bill Woods (VP China Shipping Container Lines) writing in Pacific Shipper's Forecast and Review notes that carrier capacity is the key to the inbound Transpacific trades and says that it rose in the second half of 1999 by 1.3 million teu's. In a trade that he predicts will reach 5.0 million teu's in 2000 that seems a large percentage increase. Supply seems to be following demand - a market principal.

The second example is a comment from an NVO reported in the Journal of Commerce that OSRA has made carriers more flexible and responsive allowing NVOs to form better relationships with them and offer wider choices for their customers. This may be sparse anecdotal evidence but it is positive - and emphasizes the practical over philosophical differences.